TIME

Sam Palmisano’s Advice to Younger Tech Titans: Don’t Show Up to Davos in a Hoodie

Dell & IBM CEOs On Technology, Innovation, and Deficit Reduction
Samuel "Sam" Palmisano, former chief executive officer of International Business Machines Corp. (IBM). Bloomberg—Bloomberg via Getty Images

IBM has been, in many ways, the Teflon tech company. At a time when big Silicon Valley firms like Apple, Google, Yahoo and others have been under fire for everything from tax avoidance, to offshoring, to playing fast and loose with privacy, the 101 year old Armonk, NY giant has managed to look like the model for socially responsible business. It has garnered good press for everything from its educational initiatives, to its support for local supply chains in the U.S. Its Smarter Cities initiative, in which it works with local leaders to knit together public transport, economic development, energy, and digital strategies is another example of how the company deftly manages to bridge the global/local divide.

A good chunk of the credit for this goes to former IBM CEO Sam Palmisano, who led the company between 2003 and 2011, during which time it achieved record performance, in part by successfully shifting its business model from hardware to services, but also for connecting social goals in areas like education, health and safety with revenue building, under the “Smarter Planet” strategy. Basically, IBM figured out not only how to make money serving local governments by building out city infrastructure, providing products and services in schools, hospitals and elsewhere, but how to avoid some of the globalization backlash that typically plagues big tech companies with fat margins and multinational reach.

I’ve always been interested in how the company pulled all this rare feat off. That story is one of the things that Palmisano is touting in his new eBook, Re-Think: A Path to the Future, which is meant to be a roadmap for how to build a 21st century multinational. The title is unsexy, and, truth be told, so is much of the book itself. But Palmisano, who is now a director at the Center for Global Enterprise (which aims to research and roadmap the practices of the most successful and sustainable firms around the world, from family owned businesses in Germany to American blue chip multinationals) does have some interesting insights and old school corporate wisdom that the younger generation of Silicon Valley techies, as well as any number of other corporate leaders, should pay attention to. Below, his five most interesting takeaways:

  1. “Don’t show up to Davos in a hoodie.” That was Palmisano’s tongue in cheek answer to my question about why tech is no longer Teflon. But his point is actually serious. Too many corporate leaders are inward facing, focused mainly on themselves and their own corporate cultures. 21st century leaders are going to be dealing with a much broader range of stakeholders – both public and private – in a bigger array of geographies than ever before. It’s important to reflect and understand those cultures, not just your own.
  2. Localnomics matter. The brilliance of IBM’s Smart Planet strategy is that it’s totally global, but feels local. “To succeed as a globally integrated enterprise today, you have to connect with the local agenda,” says Palmisano. Smart Planet allows IBM to embed its products and services in local schools, sanitation services, hospitals, and power companies. They become a go to player in providing basic public services – thus building trust in local communities.
  3. Cities are more important than countries. They are where over 50% of the world’s population, and most of its money, is. “Life comes together in cities, not in countries,” says Palmisano. IBM builds its business around the biggest and most important ones.
  4. Values can be motivational. When he was faced with the challenge of trying to get a bunch of patent holding IBM engineers who’d spent a lifetime building a PC business to ditch that and come up with a new technology strategy around services, Palmisano issued a challenge: “What can this company do to create a safer and more secure society?” The result, after several years, was Smart Planet. Of course, it didn’t hurt that he threw $100 million in blue-sky money at them to help develop promising ideas.
  5. Which goes to the final point – think long-term and ignore the bankers. When Palmisano realized the company had to evolve or die, back in 2006, he decided to take a radical step and refuse to issue quarterly earnings guidance to the Street. “I knew we had a good plan, but I also knew we needed time to execute it, and it was going to be tough to have the operational flexibility we needed,” with Wall Street analysts watching for an earnings bump every few months. The long-term thinking paid off – two years later the stock soared. Palmisano believes more companies, particularly high performing ones, should make the same decision. “If you are trying to squeeze a few more cents out every quarter, it can be hard to make the best long term decisions.”
TIME China

China’s Growing Debt Problem

A new hurdle for the world’s second largest economy

One of the most telling economic events since the financial crisis has gone almost entirely unnoticed. A few weeks ago, China had its first corporate-bond default. The company in question, a solar-energy-equipment firm called Shanghai Chaori, was small, private, highly leveraged and not very important. But the default speaks volumes about the state of the world’s second largest economy. China is in the middle of a debt crisis the likes of which we haven’t seen since the fall of Lehman Brothers. Chaori’s default was tiny by comparison. It couldn’t make a payment on a $163 million bond; Lehman owed $613 billion when it folded. But it’s the tip of an iceberg that is now nearly double the size of China’s GDP. By allowing Chaori to go bust, the Chinese signaled they’re no longer in denial about the problem.

That matters in a country in which statistics are precooked and every economic move, even the run-up in debt itself, is planned. Back in December 2008, I met in Beijing with Jiang Jianqing, the head of ICBC, China’s largest financial institution. He acknowledged that the massive government stimulus program that was put in place to cope with the global slowdown would result in a higher percentage of bad Chinese loans. After all, when Beijing says, “Lend,” state-owned banks ask, “How much?” even if borrowers aren’t creditworthy. China’s biggest banks wrote off more than twice the level of bad loans last year as they did in 2012.

That’s no surprise given the size of China’s debt bubble. Over a year ago, Ruchir Sharma, head of emerging markets for Morgan Stanley Investment Management, pointed out that China was pumping out credit faster than any other country. The problem: much of it went into dubious public-sector investment (unneeded rail lines and housing projects) rather than productive private enterprises. Five years ago it took just over a dollar of debt to create a dollar of economic growth in China. Today it takes four dollars of debt to create a dollar of growth. Those are crisis numbers by any standard.

A financial crisis in China isn’t the same as one in the U.S. For one, Chinese debt is almost completely Chinese-owned. A large chunk of it is in the public sector, and the central government, which holds some $4 trillion in reserves, can bail out firms at will. Indeed, as the Conference Board’s China economist Andrew Polk points out, they’ve done that more than 20 times in the past two years, a measure of how long the crisis has been brewing. “It will be difficult for China to have a Lehman moment,” he says, “because China can always find a buyer of last resort somewhere in the state system.”

That sounds good, but it also means China can let its debt crisis fester. That will only make things worse in the long run, increasing moral hazard and slowing economic growth, which may be as low as 5% this year. (That’s down from double digits a few years back.) Worse, the government is already using those figures as a reason to backtrack on its recent promises to reform the economy. Beijing is now talking about more stimulus to keep the country’s growth rate up around the 7% it says is needed to keep unemployment from reaching dangerous levels. China’s leaders fear unemployed masses taking to the streets: historically in the Middle Kingdom, those sorts of events tend to end with people being paraded around and then shot.

Trouble is, the argument that more debt is needed to keep unemployment down no longer holds water. As Sharma points out, every percentage point of GDP growth now creates around 1.7 million new jobs–up from 1.2 million a decade ago. Also, fewer young people are coming into the workforce as the population ages. That means even 5% growth would likely keep the Chinese economy stable. So why isn’t the country doing more to deflate its debt bubble and change its economic model? Because as in the U.S., the political and economic elite have little impetus to change a system that has made them fantastically wealthy.

That’s the real economic risk factor in China right now. While Beijing may allow firms like Chaori, which are not systemically important, to go under in order to convince people that it’s grappling with the debt issues, provincial governments and state-owned companies are still too big to fail. That might not result in a Lehman Brothers moment. But it will make it harder and harder for the country to move to its next stage of economic development, which, given that China has represented about a third of global growth since the 2008 financial crisis, has implications for us all. Will China be a drag or a boon to the global economy? Perhaps more than at any other time since the country began its transition to capitalism some 30 years ago, the answer is as blurry as the air in Beijing.

TIME

The Rise of Finance and the Fall of Business

Two of the biggest business news events of the moment—GM’s ignition switch scandal and the hoopla over Michael Lewis’ new book about high frequency traders—actually have roots in the same issue: the financialization of America. This is a topic I’ve been fascinated with for some time. As finance and financial thinking have grown more and more dominant in our business landscape over the last several decades, you are seeing all sort of systemic problems, from the triumph of the bean counters over the engineers at GM to the rise of trading that enriches only the trader, rather than society. I feel strongly that the financialization of American business is leading to short term thinking and a huge variety of problems—everything from the focus on share-buybacks over R & D spending in so many Fortune 500 companies, to the fact that we have a tax code that treats gains from short term trading the same way it does those from long term holdings. I can only conclude that this is a trend that will continue. The latest Bureau of Economic Analysis numbers out earlier this year show that finance as a percentage of our economy is once again creeping back up. NYT columnist Joe Nocera and I discussed this and more on this week’s episode of WNYC’s Money Talking, here:

TIME

Give Mary Barra a Break: Leave Gender Politics Out of the GM Scandal

General Motors Co's new chief executive Mary Barra addresses the media during a roundtable meeting with journalists in Detroit, Michigan in this file photo from January 23, 2014.
General Motors Co's new chief executive Mary Barra addresses the media during a roundtable meeting with journalists in Detroit, Michigan in this file photo from January 23, 2014. Reuters

At the risk of sounding like a GM apologist—which I am definitely not, see here—I have to say that I was disappointed in the political grandstanding of many of the Congress members who grilled CEO Mary Barra over GM’s faulty ignition switch scandal which has resulted in a number of deaths and accidents. In particular, I found Senator Barbara Boxer’s statement that she was “very disappointed, really, woman to woman” in Barra dismaying.

There’s no question that GM’s performance has been concerning. The evidence presented in the hearings over the last couple of days made it clear that the company knew about problems with the ignition switch and made a decision not to do a recall or change the part prior to rolling out vehicles. Whether this was a cynical decision made by some malevolent bean-counter, or simply the result of a company that was, as Barra put it, full of “silos” that didn’t talk to one another, remains to be seen. Much hinges on the results of the federal investigation into the matter.

Until then, though, could we please leave gender politics out of the discussion? Not only is there no evidence that Barra knew anything at all about the issue, I hate hearing comments like the one Boxer made, which make it seem like Barra has some special, higher calling as a woman leader. That sort of comment is just as sexist as the opposite sort that might have been made in the days of Old Detroit. For my money, Barra has performed admirably in a tough situation, being reasonably transparent, saying she doesn’t know things when that’s actually the case (imagine – a corporate leader being straight and frank!), and generally setting a standard for crisis management.

Of course, if we find out in the course of the investigation that she knew something about the problem or was in any way part of the culture of secrecy and bean-counting that seemed to characterize the old GM, I’ll be eating my words. ( I doubt that will be the case; the company probably wouldn’t have put her front and center of the scandal even prior to the Congressional hearings if she did.) But if that turns out not to be the case, I’m wondering if she may become the model for a new kind of post financial crisis CEO. Prior to 2008, we had a decade of celebrity CEOs. After 2009, America’s corporate leaders just wanted to keep their heads down and stay on script. Now, Barra is front-and-center, acting not like a talking head or a corporate drone, but a real person. If she manages to bring her company out of this crisis, and create a new corporate culture for GM, Boxer may be the one eating her words.

TIME

Here’s Who Is Really to Blame for the Epic GM Scandal

2005 Chevrolet Cobalt SS
The 2005 Chevrolet Cobalt SS is displayed on the floor of the North American International Auto Show in Detroit Michigan, in this file photograph taken January 5, 2004. Gregory Shamus—Reuters

It’s a revelation that has people’s hair standing on end. In yesterday’s Congressional testimony on the GM ignition switch scandal, it was revealed in a 2005 email that a decision had been made not to replace the switch (which was known to have problems) because it would cost the company 90 cents per switch to do so. No wonder CEO Mary Barra, who very likely had nothing to do with any of this but is still left holding the bag, has called in Kenneth Feinberg, the lawyer who handled the victim’s funds for 9/11 and the Gulf of Mexico oil spill, to deal with the potential payouts to victims of accidents caused by the faulty switches.

The fact that the bean-counters seem to have won out over the quality control and design factions at GM puts me in mind of a book review I did in 2011 on former GM vice-chair Bob Lutz’s Car Guys Versus Bean Counters: The Battle for the Soul of American Business. In it, Lutz wisecracks his way through the 1960s design- and technology-led glory days at GM to the late-1970s takeover by gangs of MBA’s. Executives, once largely developed from engineering, began emerging from finance. The results ranged from the sobering (managers signing off on inferior products because customers “had no choice”) to the hilarious (Cadillac ashtrays that wouldn’t open because of corporate mandates that they be designed to function at -40°F). It’s pretty easy to imagine Car Guy Lutz removing his mirrored shades and shouting to the cowering line manager, “Well, customers in North Dakota will be happy. Too bad nobody else will!”

GM’s problems today, of course, aren’t funny. And neither is the history of the triumph of bean counters over car guys in the auto industry. It’s a history that has deep roots that go all the way back to the 19th century, to the invention of the numerical religion known as “efficiency theory” by Frederick Winslow Taylor. Its core concept—the notion that anything which can be measured can be managed—was picked up and re-popularized by Henry Ford but also one-time Ford CEO and former Secretary of Defense Robert McNamara.

The last several decades of economic and business history might have been quite different if not for McNamara, who, under President John F. Kennedy and later Lyndon Johnson, was largely responsible for the failure of U.S. strategy in Vietnam. His obsession with systems analysis—in which data about every aspect of the war effort, from bombs to defoliants to fatalities to the number of enemy vehicles disabled per airstrike megaton was collected in order to maximize efficiency—blinded leaders to the overall strategic failures of the war effort. Since it was impossible to argue with numbers, it was difficult to question McNamara’s thinking, a topic well described in books like The Best and the Brightest.

But a less well-known aspect of McNamara’s legacy was how he brought financial efficiency theory to corporate America, introducing a culture of management by numbers that eventually undercut productivity in some of America’s top corporations. Long before his ideas shaped the war effort in Vietnam, McNamara launched an attack on Ford, where he developed a mania for squeezing fractions of pennies out of the cost of a set of front-wheel lug bolts, while ignoring the creative side of the company, a strategy which eventually led the automaker to lose its global dominance. It’s a legacy that’s being felt within the industry even today—in fact, I’d say that GM’s current recall scandal, in which a decision to save 90 cents on an ignition switch led to numerous deaths and a Congressional investigation, can be traced all the way back to the ideas that McNamara popularized in the industry.

The streamlining of Ford was orchestrated by the “Whiz Kids” who came out of the Pentagon’s statistical analysis department, of whom McNamara was the best known. Hired by Henry Ford II himself, the Whiz Kids cut costs and bolstered the company’s stock price, but also undercut investment in product development, which resulted in a decline in overall productivity at the company from 1965 onwards. Managing by numbers became endemic in corporate America as the Whiz Kids went on to run many more Fortune 500 firms.

The result was a loss in international competitiveness on the part of American firms as a whole as Whiz Kid notions of quantitative, cost-driven management came to dominate business education in America. (Harvard Business School in particular built its curriculum around these ideas.) Yet as the number of MBAs and management consultants in corporate American rose (“if you can measure it you can manage it” actually became known as the McKinsey Maxim), U.S. business actually lost much of its innovation mojo.

As the GM scandal shows, we are all living in the green eyeshade-tinted world of Robert McNamara today, a world in which numbers all too often get in the way of really good ideas – or even the value of a human life.

 

TIME wall street

High-Speed Trading Is Turning Wall Street Into a Casino

Everyone is talking about Michael Lewis’ new book, Flash Boys: A Wall Street Revolt. The book basically calls into question whether high-speed trading, used by geeks and money men alike to front-run the market, is even legal. Whether or not it is, many of us would agree that ultra-short-term trading of this sort isn’t what the markets were intended to foster. And indeed, it’s particularly sad that many of the people who develop flash trading programs are math PhDs that might instead be creating, say, green turbine engines or solving global warming or doing something a lot more useful than building trading technology to make rich guys even richer.

All of this reminds me of the first time I heard about the inside details of high frequency trading, from a friend who used to do it for a major financial institution. He explained how he built computer programs that would spot where the little “fish” in the market were headed, and then throw some false bait to them. Meaning, in other words, that his very large institution would throw a little cash into whatever trades they were interested in, to further excite the feeding frenzy. Then the big institution’s more sophisticated trading systems would kick in to eat their lunch with a better trade on the other side of the pond. That’s somewhat different from what Lewis’ describes, but it’s all part of the same phenomenon—trading for trading’s sake, and financial transactions that represent value only for the trader, rather than for the companies or assets being traded, or society at large.

It’s not what Adam Smith had in mind when he extolled the virtues of the market’s invisible hand. But given that our tax system doesn’t penalize anyone for short-termism (high-speed trading gains are taxed at the same rate as any other investment gain), it’s no wonder that this kind of trading is growing, creating market volatility and costing institutions and individual investors hundreds of billions in lost wealth. The entire value of the New York Stock Exchange now turns over roughly every 12 months, a rate that has doubled since the early 1990s. As Warren Buffett once told me, “You’ve got a body of people in the market who’ve decided they’d rather go to the casino, rather than the restaurant.”

I hope the Lewis book leads to a rethink of the legality of trading—because it’s costs don’t just end with markets themselves. This rise in trading and particularly high-speed trading has coincided with a decrease in the amount of lending to small and mid-sized businesses. It’s no surprise why: effective lending is expensive and time-consuming. You have to know your customer and your industry, which takes time, money, and research. Trading, especially when you can work mainly with borrowed money and massive volume, is much more profitable. Any Flash Boy can tell you that.

TIME Federal Reserve

The Fed Is Right to Worry About ‘Kitchen-Table Economics’

File photo of U.S. Federal Reserve Vice Chair Yellen testifying on her nomination to be the next chairman of the Fed during a Senate Banking Committee confirmation hearing in Washington
Janet Yellen during a Senate confirmation hearing on her nomination to be the next chairman of the U.S. Federal Reserve in Washington, D.C., on Nov. 14, 2013 Joshua Roberts—Reuters

Under Federal Reserve chief Janet Yellen, community development, which has always been part of the Fed’s mandate, though an oft-neglected one, seems to be coming back in vogue

Anyone who was worried — based on Fed chair Janet Yellen’s recent comments about interest rates rising as early as 2015 — that she was turning hawkish should be reassured by a speech she gave today in Chicago. Her comments focused on what the Fed should still be doing at this point in the recovery to promote a stronger labor market. She made it very clear that she sees our lingering post-financial-crisis unemployment problems as cyclical, rather than structural. In other words, there’s a lot of slack in the labor market, and there’s more the Fed can do to fix that. “The government has the tools to address cyclical unemployment,” Yellen said. “Monetary policy is one such tool.” That’s why the market shouldn’t take the Fed’s recent scale back of its asset-buying program as evidence that it’s giving up — merely that it’s changing its focus.

What’s interesting is where Yellen seems to be throwing her attention: community development. Her speech in Chicago was given at the National Interagency Community Reinvestment Conference, and kicked off a day that the chairwoman will spend touring the City Colleges of Chicago high-tech manufacturing program. Now, I’m not a Fed historian, but I’m willing to bet that this in the first time in quite a while that any Fed chair has done a community college and manufacturing tour. Ben Bernanke and certainly Alan Greenspan would have been more likely to hang out in the circles of power on Wall Street and in Washington, D.C., either by choice or by force.

But under Yellen, community development, which has always been part of the Fed’s mandate, though an oft-neglected one, seems to be coming back in vogue. As I wrote in a column a few months ago, America’s central bankers are giving it more and more attention, now that the effects of an easy-money environment seem to be spent. Boston Fed president Eric Rosengren was a catalyst for the Working Cities challenge, which offered up grant money to Massachusetts cities that could come up with the most politically collaborative ways to bolster job growth. (The fact that the winners had to demonstrate cross-aisle cooperation in economic development was an interesting nudge to a dysfunctional Washington.) The Kansas City Fed is starting a similar program. The San Francisco Fed is partnering with the Low Income Investment Fund, a community-development institution that bridges the gap between low-income borrowers and private capital.

All of this speaks to the fact that over five years on from the financial crisis, banking has still not been remoored in the real economy. Wall Street isn’t really interested in grassroots lending or economic development, no more so than before the crisis. Why should it be, when trading is so much more profitable? But Yellen is clearly taking her role as America’s banker in chief seriously, and acting on the sort of “kitchen-table economics” she promised when she spoke to TIME on the day of her confirmation. Today’s speech and the increasing Fed action around economic community building shows that, as she put it, “the scars from the Great Recession remain” and that the Federal Reserve owes it to the American people to bail out not just banks, but workers too.

TIME

Squeezing the World’s Oligarchs Will Not Work

Manhattan Skyline
Oliver Morris—Getty Images

I lived for nine years in London, starting in the late 1990s. During that time, I watched many of the prime areas of the city—Mayfair, Hampstead, Knightsbridge—being bought up by Russia oligarchs looking for a place to expatriate their money. More recently, that’s happened in the U.S. too. There are entire buildings in New York, like 15 Central Park West, that are populated by rich Russians looking to diversify their portfolio outside of their increasingly tumultuous home country.

Now, with US and European sanctions on the movement of money in and out of Russia, are we may start to see a shift in ownership in some of the world’s top real estate markets. The question is, “what difference will this really make to the economic situation in Russia?” My feeling: not much. One of the reason that sanctions are so far concentrating on asset flows, rather than the really important stuff like oil and gas exports, is that Europeans aren’t on board with playing a game of petro-politic chicken with Putin. They get 30% of their energy flow from Russia, and are much more vulnerable to the negative effects of such a game, in the form of higher energy prices or gas shortages. This means that one of the few levers the West has against Putin right now is targeting financial flows of Russian billionaires.

One thing that will be interesting to see, as the sanctions move forward, is just how much money the oligarchs have actually stashed abroad, which is a good measure for how risky they think their own economy is. It’s no accident that many emerging market billionaires in places like China, Brazil, and Turkey have begun moving more money abroad in recent years, as political risk in such emerging markets increase, and returns decrease. For more on this topic, listen to the latest episode of Money Talking, where I discuss it with the New York Times’ Joe Nocera, and Charlie Herman:

TIME

Stress Tests Are Not Making Banking Any Safer

Pedestrians walk past a Citibank branch in Mumbai Dhiraj Singh / Bloomberg / Getty Images

Earlier this year, I wrote a cover story on Fed Chair Janet Yellen expressing the hope that she would help finish the work of cleaning up our banking system, a problem which still remains over five years on from the financial crisis. This week’s Fed rejection of Citigroup’s dividend payout plans gives me some hope that she’s taking that job more seriously than her predecessors.

The Fed “stress tests,” which govern the right of banks to give money back to shareholders, are designed to make sure that before banks attempt to drive up their value by paying dividends or buying back stock, they actually have enough capital on hand to do what they are supposed to do, which is to lend money to real businesses, and make markets safely. It’s interesting to me that while Citigroup’s capital cushion comfortably exceeded the mandated 5 % minimum, the Fed still denied the company’s plans to give money back to shareholders. It said that banks hadn’t made enough progress in areas like risk management and that the central bank didn’t buy Citi’s ability to manage its future revenue stream. Basically, the Fed said, “we aren’t buying your ability to manage risk and do business safely.”

Should we feel reassured by this? Yes, and no. The thing that I’m happy about is the fact that the Fed seems to be thinking about risk in a more nuanced way. It’s not only about the amount of capital that you have on hand, but how you manage it. Even well capitalized banks can make mistakes and have bad controls in place, and frankly, as I’ve been saying for some time, big bank’s risk management is really rune reading anyway. At best, you’re throwing a bunch of hunches about all the bad things that could happen in the world into a black box, and shaking them around, and hoping for the best.

The thing that still worries me is that Citi, which was comfortably above the mandated capital limits, is still holding only 6.5 % “Tier One” capital – that’s the good kind, meaning cash and cash equivalents. Let’s look at that another way: It means that this bank does its regular daily business with over 93 % borrowed money. As I pointed out in my cover from last year, “How Wall Street Won,” that’s a ratio that any other type of business in America wouldn’t dream of. There are plenty of people who think that in order to have a truly safer system, we need to stop treating banks as though they are special, and start making them act like every other business in America. For more on that, see Stanford professor Anat Admati’s piece on this topic in the New York Times.

TIME Economy

Globalization in Reverse

What the world’s trade slowdown means for growth in the U.S.—and abroad

Recent conflicts everywhere from Ukraine to the Middle East and the South China Sea remind us (as Robert D. Kaplan wrote in TIME’s March 31 cover story) that geography still matters, even in a globalized age. Politically, the world is certainly not flat. New economic figures show how increasingly rocky our world is becoming economically too. Globalization is often defined as the free movement of goods, people and money across borders. Lately, all of those have come under threat–and not just because of sanctions limiting travel and the flow of money among Russia, the U.S. and Europe. Over the past two years, global trade growth has been lower than global GDP growth. It’s the first time that has happened since World War II, and it marks a turning point in the global economy, with sweeping implications for countries, companies and consumers.

There are many reasons global trade is growing more slowly than it has in the past. Europe is still struggling to end its debt crisis, and emerging markets are expanding more slowly than they were. But one of the biggest factors is that the American economy is going through a profound shift: the U.S. is no longer the global consumer of last resort. As HSBC’s chief economist, Stephen King, pointed out in a recent research note, during postwar recoveries past, “the U.S. economy acted as a giant sponge,” absorbing excess goods and services produced by the rest of the world. Booms would bust; markets would crash and recover. And whenever they did, you could be sure that Americans would start spending again, and eventually our trade deficit–the level by which imports exceed exports–would grow. That’s now changing. After nearly five years of recovery, the U.S. trade deficit isn’t growing but shrinking. In fact, it was down by about 12% from 2012 to 2013.

That’s not necessarily a bad thing for us. Part of the reason the deficit is shrinking is that our shale-oil and gas boom means we are buying less foreign fossil fuel, and our manufacturing sector is growing. But part of it is that wages haven’t come up since the crisis, and consumer spending is still sluggish. In order for the U.S. and the world economy to keep growing, somebody has to shell out for the electronics, cars and other goods we used to buy more of.

Unfortunately, no one is doing that. Europeans, still stuck in a debt crisis, probably won’t spend again for another five years. Emerging-economy countries, in various levels of turmoil, are growing at roughly half the rate they did precrisis. The Chinese, who picked up a lot of the global-spending slack after the financial reckoning of 2008, are now in the midst of a financial crisis of their own. Japan did its bit last year, but Abenomics–the government’s plan to encourage spending, named for Prime Minister Shinzo Abe–is running out of steam. Everywhere, says Mohamed El-Erian, chief economic adviser to insurance giant Allianz, “there is a mismatch between the will and the wallet to spend.”

With global economic integration seemingly in reverse, at least for the moment, many economists and trade experts are beginning to talk about a new era of deglobalization, during which countries turn inward. Some of the implications are worrisome. Complaints to the World Trade Organization about protectionism, intellectual-property theft and new trade barriers are rising. Trade talks themselves are no longer global but regional and local, threatening to create a destructive so-called spaghetti bowl of competing economic alliances.

Yet deglobalization isn’t necessarily all bad. As U.S. Trade Representative Michael Froman said at an economic summit in Washington recently, it also “means companies are looking at their extended value chains, supply chains, and deciding whether they want to move some production back to their home country.” That’s already happened in the U.S. A study by the Boston Consulting Group found that 21% of all manufacturing firms in the U.S. with $1 billion or more in sales are actively reshoring, and 54% say they are considering it.

Whether or not those jobs will help boost wages is something the Federal Reserve will be watching carefully. One of the hallmarks of the past 30 years of globalization was an easy-money environment. As Fed Chair Janet Yellen indicated at her latest press conference, we are coming to the end of that era. In this new economic age, not all boats will rise equally or smoothly. Markets, which had more or less converged for the past 30 years, will start diverging along national and sectoral lines. Our economic landscape, like our political one, will become more volatile and less predictable. Get ready for a bumpy ride.

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